Going Down?

Plan For The Worst

A recession will rear its ugly head eventually, argues Eric Flamholtz, a management professor at UCLA. Flamholtz, who is also president of Management Systems Consulting Corp. in Los Angeles, emphasizes the need for strategic planning to avoid having to make critical decisions in the midst of a crisis. "No one thinks clearly in a crisis," he says. "Plan ahead. Do more with less. Consider how you might reorganize your company as a result of potential layoffs or attrition. You may have to redefine people's roles--you can't assume that responsibilities will be automatically picked up by remaining employees. Study how you can reorganize so fewer people can still cover everything that must be done."

McCoy of PricewaterhouseCoopers recommends using part-timers and independent contractors to fill in the gaps. He stresses that in an economic downturn, "It's important to consider working capital management [accounts receivable, inventory and cash] and the potential impact on customers and suppliers."

You'll also need to consider your customers. "Ascertain if your credit terms are right, how vulnerable your customers are, and whether you have too many unprofitable [ones]," McCoy says. "Make sure you aren't dependent on too few suppliers, and determine how vulnerable your suppliers are." McCoy suggests making your company important to the success of your customers and suppliers to ensure the type of enduring relationships that are essential during hard economic times. "Enter into supply agreements with vendors," he advises, "and provide value-added services to customers."

John LaRico is doing just that. "[We're] re-emphasizing personalized customer service and re-evaluating our vendors to secure the best value," says the co-owner and vice president of Golden Grocer Natural Foods Inc. in St. Louis. LaRico has repositioned his three health-food stores to appeal to price-conscious shoppers. "We've established everyday low prices. It's been necessary to cut overhead, but it's been effective in generating sales."

Despite the expected economic downturn, LaRico, 50, sees sales increasing in 1999 beyond the $2 million level the company reached last year. "While we're reducing overhead and studying operations to find other revenue streams and budget cuts, we're also augmenting marketing efforts," he says. "We just launched a vigorous new marketing program--including TV and print ads--with financial support from our vendors. The arrangement helps cut costs and boost sales."

Cutting costs is exactly what Joan Chan plans to do--again. The 45-year-old owner of Oriental Lumberland Do it Best Inc. survived the Northeast's severe construction slowdown of the early 1990s by instituting an austerity program. At the same time, she says, "[We] shrank credit terms and restricted credit to select customers. If the economy impacts our sales, we would again control credit rigidly and reduce payroll, overtime, entertainment and promotional expenses such as community newspaper advertising." The Brooklyn, New York, lumberyard and home center, with more than $3 million in sales last year, is "on the front line of the real estate business," says Chan. "We are extremely vulnerable to economic swings." Chan is also looking at debt restructuring to take advantage of low interest rates and provide a cash flow cushion for her 13-year-old company.

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This article was originally published in the February 1999 print edition of Entrepreneur with the headline: Going Down?.

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